Writing on Economics

Betting Markets as Insurance Against Psychic Losses

The existence of insurance, which dates back to at least 1000 BC, is one of the great arguments for the enriching power of markets. Insurance allows people to transfer wealth from their hypothetical future self who is not in a car accident to their alternative hypothetical future self who is in a car accident, which is mind boggling to think about. Still, as I think about the topic more, the puzzle isn’t why insurance exists in the first place, but why there isn’t insurance for more types of losses.

…as state after state flipped to red, her friends left quietly, one by one. Caffrey yelled at her husband for being too confident Hillary Clinton would win. She blamed herself for not volunteering more. Then she cried herself to sleep, “thinking about all the people who would die and suffer and become fearful and hated and hateful unnecessarily under a Trump presidency…”

…Tony Doran, a married gay man from New Jersey, was on a tropical vacation when he heard the news. “I left the luau and went back to our room and cried,” he said. “I was physically sick with terror…”

…It’s easy to mock reactions like these, but for liberals and conservatives alike, losing at the polls can produce an all-encompassing sense of despair. Conservatives experienced something similar after the election of Obama, whose socially liberal platform was anathema, for example, to many religious people.

These extreme psychic loss events aren’t just limited to politics. One paper shows a drop in France’s suicide rate following a World Cup win, an effect that would presumably work in reverse too. Another finds higher risk of stress-related deaths in cities whose team just lost a Super Bowl, and vice versa.

If the stakes of events like elections or sporting competitions are so high for bystanders, why not insure against these psychic losses in the event that your team or candidate loses? We don’t even need to imagine what such a market might look like, as betting markets already exist.

The solution is simple- if you know you will be devastated if Trump wins in 2020, place bets on Trump to win until the payout you receive upon his victory is enough to offset your psychic loss. The less likely that Trump is to win, the less you have to bet to get a given payout.

The question for another day: why aren’t people already doing this in droves?